Greek domino topples; Rest of the "PIIGS" next!

It’s Sunday morning and I’m enjoying some quality time with my two girls. Yesterday it was a local baseball game; today they’re all excited about seeing the new “Oceans” movie. I guess you could say it’s the typical quiet family weekend.

But in the bond market, it’s been anything BUT quiet. In fact, the first major sovereign debt domino toppled this past week — in Greece.

The Mediterranean nation is buried under a massive load of debts and deficits, and the numbers are shocking.

The European Union’s (EU) statistics agency has been combing through Greece’s books, and it just revised the country’s 2009 deficit tally up to a whopping 13.6 percent of Gross Domestic Product. Further revisions could send that even higher, to 14.1 percent.

That’s more than four times the official “limit” for a country in the EU. And the nation’s total debt load is now closing in on $400 billion, or 115 percent of GDP. That’s among the worst ratios on the planet.

Greece used to be able to fund its deficits at relatively low yields. But not anymore …

That’s a recipe for disaster for a country that needs to sell $72 billion in debt to cover its deficits just in the coming months.

Facing a full-scale meltdown, Greece did the unthinkable on Friday. It asked for a bailout from the EU and the International Monetary Fund. The lifeline will take the form of up to $40 billion in three-year loans from the 15 other nations that share the euro currency. Those loans will carry a below-market rate of just 5 percent. Greece can also get its hands on another $20 billion in low-rate loans from the IMF.

The market breathed a sigh of relief in the wake of the Greek aid request. Bond yields fell and stock prices rose in Athens. But …

This Is Just the Eye of the Sovereign Debt Hurricane!

I say that because Greece is far from alone.

Take another of the so-called “PIIGS” countries, Portugal.

The country’s GDP shrank 2.7 percent in 2009, the worst recession in more than six decades. The unemployment rate recently hit a 23-year high of 10.1 percent, while the budget deficit jumped to 9.3 percent of GDP. Total debt is more than 85 percent of GDP, the worst in 20 years.

Ireland? The budget deficit is almost 12 percent of GDP.

Italy? Its total debt load is on track to hit 117 percent of GDP.

Plus, Spain is battling a budget deficit of 11.4 percent of GDP.

Bottom line: Greece is just the first domino to fall. Many other European countries are next in line.

The folks in Washington are sticking their heads in the sand, ignoring the warning signs all around them. They believe the same kind of bond market collapse that just struck Greece can’t happen here. So they’re continuing to bail out banks, brokers, mortgage companies, insurance companies, automakers, unions, homeowners and the unemployed.

But now, with demand for U.S. Treasuries waning — as evidenced by a string of disastrous auctions and continued net selling by China — the only question that remains is, “Who will bail out Washington?”

The simple fact is, no institution or group of institutions on Earth has the resources to save Washington when the bond market finally gives up on our ability to manage our own finances. When that day dawns, the bond market will come apart at the seams. Interest rates will shoot the moon. Our feeble economic recovery could vanish.

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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